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Economy in Brief

U.S. Productivity Growth Weakened and Unit Labor Costs Surged
by Tom Moeller November 6, 2008

Labor productivity in the nonfarm business sector rose 1.1% last quarter. That gain was down by two-thirds from the 2Q increase and by half from 1Q. Nonetheless, the y/y gain of 2.0% remained nearly the quickest since 2004. The latest increase about matched Consensus expectations for 3Q.

Output growth fell to a negative 1.7% (+0.3% y/y) which was its weakest since the 2001 recession. Productivity, however, still rose as hours worked were reduced by an even greater degree. They declined 2.7% (-1.7% y/y).

Growth in compensation per hour nevertheless accelerated to 4.7% and that raised the y/y growth to 4.3%.

As a result of weaker productivity and quicker compensation, unit labor cost growth jumped to 3.6%. That was off the recent highs near 4.0% but the trend is one of acceleration.

In the factory sector productivity declined at a 1.0% (+1.1% y/y) rate and that was the second consecutive quarterly decline following a 3.4% increase last year. Output declined 2.6% y/y and hours worked were reduced by an even greater 3.7% y/y. Compensation growth quickened to 5.1%, the fastest since 2006. As a result, unit labor cost growth 6.1% last quarter and by 3.9% y/y, the fastest since late-2006.

The Current State of the U.S. Economy and the Fed’s Response (With Reference to Irrational Exuberance and Virgil’s Aeneid) from the Federal Reserve Bank of Dallas is available here.

Multinationals Make the Most of IT from the Federal Reserve Bank of St. Louis is available here.

Nonfarm Business Sector (SAAR, %) 3Q '08 2Q '08 Y/Y 2007 2006 2005
Output per Hour 1.1 3.6 2.0 1.4 1.0 1.8
Compensation per Hour 4.7 3.5 4.3 4.1 3.8 4.0
Unit Labor Costs 3.6 -0.1 2.3 2.7 2.8 2.2
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